Don't wait for a rainy day
We’re regularly asked what level of reserves charities should hold. There’s no right answer to this question – it’s impossible to provide a fixed framework that covers all circumstances and eventualities that affect the country’s 23,700 charities. It’s your responsibility as a trustee to make the decisions that are best for your charity, but there are some broad principles you should help you get it right.
- Agree an appropriate policy. Charities should have a reserves policy that is agreed by the trustees and sets out the level of reserves they want to hold and why. It should be proportionate for the shape and size of the charity, a few lines may be sufficient to explain what the trustees believe is required to face a future rainy day - for example, when there is a sudden loss of income.
- Set the right level. There’s no fixed amount or percentage that must be followed – you must ensure that the level you set is appropriate based on your projections for income and expenditure, your current liabilities and an estimate of likely needs and risks over the next few years.
- Regular review. The policy should be reviewed regularly to take account of different needs and circumstances. You must also consider your progress against the policy. If your policy requires you to maintain three months’ running expenditure and you only have one month’s worth, what steps will you take?
- Report on your reserves. Your Trustees’ Annual Report should tell donors, funders and other stakeholders how much you’re holding in reserve, and why.
This list isn’t exhaustive – the Charity Commission for England and Wales has guidance (CC19) that is more detailed and broadly reflects requirements in Scotland. We’re considering our own guidance in this area and in the meantime I’d urge you to reflect and act on this essential area if you haven’t already done so.
This blog first appeared in Third Force News, 15 May 2015